MAYOR MICHAEL R. BLOOMBERG’S CAMPAIGN AGAINST CIGARETTE TAX EVASION GETS MAJOR BOOST AS APPEALS COURT REINSTATES FOUR CITY SUITS AGAINST INTERNET CIGARETTE SELLERS FOR VIOLATING FEDERAL RACKETEERING STATUTES AND STATE LAW

In the latest development in Mayor Michael R. Bloomberg's
campaign against cigarette tax evasion, the U.S. Court of Appeals for the Second
Circuit has reversed several March 2006 lower court orders and reinstated the
City's lawsuits against numerous corporations and individuals who own or operate
Internet websites selling cigarettes. The decision is the latest step
forward in Mayor Bloomberg's efforts to reduce smoking in New York City, which
have led to a 21 percent drop in adult smoking and a 52 percent drop in smoking
among public high school students in the last five years.

"We will continue moving forward vigorously against those
who break the law and deprive the City of vitally needed tax dollars -
especially when such lawbreakers also undercut public health," said Mayor
Bloomberg. "I once again urge Albany to take decisive action to crack down
on cigarette bootlegging, beginning with collecting the state sales tax on
cigarettes sold on Indian reservations."

In today's 56 page ruling, the Court of Appeals, in a two
to one opinion by Judge Chester Straub, recognized that the City's complaints
stated a proper federal claim for violation of the federal RICO (Racketeer
Influenced Corrupt Organization) statutes based upon mail and wire fraud.
The Court also separately recognized that the complaints may present valid
causes of action charging violations of New York State law outlawing deceptive
consumer transactions and public nuisance, referring those questions to the New
York State Court of Appeals.

"We are gratified that the Court has agreed with the City
that these suits, which take aim at those who are illegally selling cigarettes
without paying the appropriate taxes, may go forward," said Corporation Counsel
Michael A. Cardozo. "The illegal activities of the defendants, some of
whom have already settled with the City, are causing New York City to lose
millions of dollars in tax revenue. This decision sends a powerful message
to all sellers of cigarettes on the internet: don't falsely advertise and report
your cigarette sales - because if you do, you'll be paying New York City triple
the amount of taxes that your sales would have generated."

Finance Commissioner Martha E. Stark said, "We're glad
the Second Circuit agrees that the City should have its day in court to prove
that there is no such thing as tax-free cigarettes, and that businesses that lie
to their customers, hurt small businesses that play by the rules, and undermine
efforts to reduce smoking should be held accountable."

Filed in 2003 in the Federal District Court in Manhattan,
the City's suits allege that the defendants withhold the federally mandated
Jenkins Act reports that alert state tax authorities to out-of-state cigarette
purchases, so that the purchases can be taxed. The complaints also allege
that Internet sellers assure customers that purchases will be concealed from
state tax authorities. According to the complaints, some defendants also
routinely and falsely state that cigarettes sold to New Yorkers over the
Internet are "tax free," despite New York City and State laws requiring
purchasers to pay cigarette excise and sales taxes on cigarettes purchased for
use in the state.

The City's suits seek triple the amount of the taxes the
City has lost by reason of the defendants' unreported sales to New York City
residents - which could amount to more than $15 million in recovery for the City
from these defendants alone. "The City's alleged injury of lost tax
revenue is directly caused by [the] defendants' alleged schemes," the Court
wrote in its decision.

In an effort to preserve this important source of
revenue, the City has also brought further suits, whose legal validity has
recently been sustained by a lower Federal court in Brooklyn, seeking to halt
shipments of untaxed cigarettes by cigarette wholesalers that violate the
Contraband Cigarette Trafficking Act (CCTA) of 1978, 18 U.S.C. § 2341 et seq.,
which was recently amended to permit state and local jurisdictions to bring
actions under the CCTA, a role formerly reserved to federal prosecutors.

Elizabeth S. Natrella, Senior Counsel, Appeals Division,
was the lead attorney who argued the case on appeal, with assistance from Eric
Proshansky, Deputy Chief of the Law Department's Affirmative Litigation Division
and the lead trial attorney who initiated the lawsuits and has been pursuing
various other suits on the City's behalf to enforce the City's cigarette
laws. Leonard Koerner, Chief of the Appeals Division, and Gail Rubin,
Chief of the Affirmative Litigation Division, were also actively involved in
these cases.

Well-established Federal case law provides that the
failure to file Jenkins Act reports amounts to a violation of the Federal
racketeering statutes, entitling the City to recover treble or three times its
actual losses in addition to attorney's fees. The City and State of New
York each impose an excise tax on all cigarettes possessed for sale or use
within the State and City of New York. Cigarette taxes of other states are
generally lower than New York's, allowing out-of-state retailers to offer
cigarettes at lower prices than prevail at the City's "brick-and-mortar"
stores.

According to Ms. Natrella, "The underlying assumption of
the Internet cigarette business is that the purchasers will evade the tax
imposed by their home states, because if the purchasers pay the tax, the price
difference available from an Internet purchase essentially disappears."

Deputy Chief Proshansky added, "Because the success of
the defendants' businesses relies almost entirely on customer tax evasion,
Internet cigarette sellers do everything they can to promote and assist that tax
evasion."

The Internet sellers' role in cigarette tax evasion is
their refusal to comply with the Jenkins Act, 15 U.S.C. §§ 375-378, a federal
statute enacted expressly to combat interstate tax avoidance. The Jenkins
Act requires interstate shippers of cigarettes to report out-of-state cigarette
purchases to the tax authorities of the states to which shipments are
made. Recent published reports make clear that the illegal actions of
Internet cigarette sellers cost State and local governments nationwide hundreds
of millions of dollars every year, with analysts suggesting as much as an $800
million tax loss through 2005.

While the defendants' concealment of the sales makes a
determination difficult, the loss to New York City and the State from
defendants' web-sites alone may exceed $15 million dollars per year.
Indeed, as the lawsuits have progressed, many of the defendants in the actions
have already settled with the City and provided names of the purchasers.
According to the Department of Finance website, up to September 1, 2007, the
continued efforts have recovered $3,013,218, with over $7,000,000 billed.

The U.S. General Accounting Office has concluded that
most Internet cigarette sellers do not comply with the Jenkins Act (see:
"Internet Cigarette Sales: Giving ATF Investigative Authority May Improve
Reporting and Enforcement," GAO Report 02-742 (August 2002). These illegal
actions of Internet cigarette sellers cost State and local governments
nationwide hundreds of millions of dollars every year, with some analysts
suggesting as much as an $800 million tax loss by 2005. An exhibit
filed with one of the City's complaints demonstrates through shipping
information obtained from an Internet cigarette seller that most sales are made
to purchasers residing in States with high cigarette taxes, suggesting that tax
evasion is the principal economic basis for Internet purchases.

Prior to these actions, most sellers -- including the
sites maintained by the defendants -- informed customers that the sellers
withhold sales data from state tax administrators, openly assuring customers'
that their "savings" will be protected through concealment of the
sales.

In addition, some Internet cigarette sellers, including
several of the defendants, misled their customers into believing that no state
and local taxes are owed on Internet purchases, giving false assurances on their
websites or in telephone communications. For example, defendants Hemi
Group and Kai Gachupin's CigaretteSpecials.com website
stated that "All sales are tax free!" and their www.buydiscountcigarettes.com
website had a flashing banner that said, "No tobacco tax."

To view the Law Department's press release on its
original Internet cigarette suit from January 2003, please visit the office's
web site (www.nyc.gov/law), click on the
"Press Releases" section and go to the Internet cigarette release from Jan. 17,
2003.